An ounce of prevention is worth a pound of cure.

Benjamin Franklin

Ever since corporate accounting scandals shocked the financial world at the turn of the 21st century, corporate executives have been on the radar of prosecutors and regulatory officials. Corporate officers and directors are reminded continually of the potential consequences of their management decisions each time a peer makes headlines for alleged criminal misconduct. In view of the current economic state of the nation and the new pronouncements in the 2009 Economic Stimulus Package, executives are likely to be scrutinized even more closely in the future.

Of course, healthcare companies are in no way immune to criminal investigations. In fact, it was the former CEO of HealthSouth, Richard Scrushy, who was the first chief executive charged with violating the 2002 Sarbanes-Oxley Act. Because of the public welfare aspect that healthcare companies implicate, they are often at or near the top of the list of companies susceptible to criminal prosecution. Because healthcare executives could violate a wide range of criminal statutes, from fraudulent financial reporting to misbranding a product, executives must be cognizant that the day-to-day decisions they make not only have civil implications, but can lead to criminal charges as well.

In the post-Enron era corporate prosecutions have increased.¹ In 2007, U.S. Attorneys’ offices alone opened 878 new criminal healthcare fraud investigations involving over 1,500 potential defendants.² In view of the increased emphasis on combating corporate misconduct, executives need to stay informed of what may be an indictable offense and take proper steps to prevent even an allegation of criminal activity. It might be clear to an officer or director that his or her individual business decisions have potential ramifications. What might not be apparent, however, is that liability may be imposed for acts the officer did not even know were illegal, or may be imposed based on actions of subordinates working under the direction or control of management.

I. The Ever-Changing Standard of Criminal Intent

Though corporate officers are vulnerable to charges under some common law crimes, most corporate prosecutions involve crimes that are established by federal or state statute. The majority of criminal statutes require evidence of “knowing” conduct; that is, they are general intent crimes that require that the defendant acted with knowledge or awareness of the facts involved but do not require proof that the defendant was aware he or she was violating a specific law or regulation. Additionally, some laws mandate that the defendant have “willfully and knowingly” committed the alleged criminal conduct. An act is willful if it is done voluntarily and intentionally with specific intent, and again, ignorance of the law is typically no excuse.³ These terms have often been applied inconsistently by the courts, and much debate has arisen over what intent requirement to apply when corporate criminal liability is an issue.

For instance, in 1995, the Court of Appeals for the Ninth Circuit held in Hanlester Network v. Shalala that a healthcare network had not violated certain Medicare and Medicaid anti-kickback prohibitions.⁴ The Ninth Circuit interpreted the knowing and willful requirements of the applicable statute to mean the government had to prove the defendants knew the conduct was unlawful and acted with specific intent to disobey the laws at issue. Hence, the Ninth Circuit sided against the general jurisprudence that recognizes ignorance of the law is not an excuse.⁵ The United States Supreme Court also has held specific intent to be the proper standard in cases involving willful violations of tax laws, holding that, because of their complex nature, such tax laws were “highly technical statutes that presented the danger of ensnaring individuals engaged in apparently innocent conduct.”⁶ In direct contrast to Hanlester, the Eighth Circuit in United States v. Jain did not allow a defendant charged under the Medicare anti-kickback statute to assert a defense based on ignorance of the law.⁷ Instead, the court upheld the conviction of a psychologist where the government merely proved that the defendant doctor knew the conduct was “wrongful,” and held the government was not required to prove the defendant knew he violated “a known legal duty.”⁸ The Jain court held Hanlester was distinguishable because it involved an administrative debarment proceeding.⁹

Ultimately, the meaning of the term willfully “is often dependent on the context in which it appears.”¹⁰ Thus, the language used in each criminal statute can lead to different results. It would be impractical to require an executive to be aware of every potential statutory law that could be implicated as a result of his or her actions. It is practical, however, to be aware of the patently obvious regulations that are applicable in the healthcare arena and to take proper steps with legal counsel to ensure that decisions undertaken in the name of the company are done so with criminal liability issues in mind.

II. The Responsible Corporate Officer Doctrine

Although criminal intent is a crucial element a prosecutor must prove with regard to most crimes, be aware that an officer or director may face criminal liability for acts of which they have no direct knowledge. Under the “responsible corporate officer doctrine,” an officer may be subject to criminal liability for corporate violations of laws that affect the public welfare, even if the officer did not personally participate in the wrongful acts. While such a standard may be hard to reconcile with the previous discussion of criminal intent, the standard is akin to the common law standard of strict liability, which disregards the state of mind of the culpable defendant. The responsible corporate officer doctrine has been firmly established by two United States Supreme Court decisions.

In the first, United States v. Dotterweich, the Supreme Court held that a corporate officer could be held personally liable for the corporation’s violation of strict liability provisions of the Federal Food, Drug, and Cosmetic Act (FDCA). The Court held that the defendant officer had a “responsible share in furtherance of the transaction which the statute outlaws.”¹¹ The Court found that the purposes of the FDCA “touch the lives and health of people which, in circumstances of modern industrialism, are largely beyond self-protection.”¹² Finding the defendant could be convicted of a crime even absent involvement or knowledge of the conduct, the Court emphasized that the public welfare component of the FDCA statute at issue mandated imposing strict liability on the officer.¹³

In United States v. Park, the Court elaborated on this “responsible relation” test. In Park, a case involving mislabeled drugs, a corporate board of directors was found criminally liable for acts of which they alleged they had no knowledge. Finding liability was warranted; the Court held that the executives had “a duty to implement measures that will insure that violations will not occur.”¹⁴ The Court noted that while these were demanding requirements, “they are no more stringent than the public has a right to expect of those who voluntarily assume positions of authority in business enterprises whose services and products affect the health and well-being of the public that supports them.”¹⁵ In summary, the Court held that strict liability under the FDCA may be imputed to a corporate officer where it is found that the officer had, “by reason of his position in the corporation, responsibility and authority either to prevent in the first instance, or promptly to correct, the violation complained of, and that he failed to do so.”¹⁶ While this doctrine proffers a harsh result, Dotterweich and Park somewhat restrict the rule.

While a corporate officer may have overall responsibility for the duties and obligations of the corporation and thus is responsible to ensure compliance with the law, the doctrine imposes criminal liability only upon officers who are directly responsible or accountable for the corporation’s compliance. In any potential case, the determination of whether an officer is directly responsible for the conduct is a matter left to the discretion of prosecutors prior to indictment or by judges post-indictment. The question of responsibility, “depends on the evidence produced at the trial and its submission — assuming the evidence warrants it — to the jury under appropriate guidance. […] In such matters [,] the good sense of prosecutors, the wise guidance of trial judges, and the ultimate judgment of juries must be trusted.”¹⁷ Thus, for the responsible corporate officer doctrine to apply, there must be sufficient evidence to show that the officer had a “responsible relation” to the corporation’s obligation at issue.

As an additional note, Dotterweich and Park involved sections of the FDCA that contained strict liability provisions. While not all criminal statutes contain such provisions, it is important to be conscious of those that do impose strict liability, especially for those operating in an industry where public welfare is of paramount concern.

III. Relevant Criminal Statutes

To take precautionary steps to avoid criminal liability, it is important to be aware of the statutes prosecutors use most often. While numerous state criminal statutes are also applicable to healthcare concerns, the following is a non-exhaustive list of criminal statutes that the federal government may invoke against healthcare executives:

• The provisions of the Federal Food, Drug and Cosmetic Act regarding misbranding¹⁸ and the introduction of unapproved drugs.¹⁹ Further, since there is no statute specifically stating that off-label drug promotion is a crime, prosecutors often use the misbranding statute to prosecute manufacturers that engage in off-label drug promotion beyond the uses described by the FDA-approved label.²⁰
• The False Claims Act. The FCA is a civil statute that allows the United States to bring charges against individuals attempting to defraud the government.²¹ There is also a criminal counterpart that allows for criminal penalties against anyone who knowingly presents, or causes to be presented, to the U.S. government a false or fictitious claim for payment.²²
• Numerous provisions of the Social Security Act²³
• Criminal statutes enacted under HIPAA²⁴
• General Criminal Statutes²⁵

Officers and directors are advised to consult with counsel to obtain the specific provisions of criminal statutes and regulations that could come into play in their line of business. Information and awareness are crucial to structuring a corporate environment that is shielded from criminal misconduct and potential liability for such conduct.

IV. Avoiding Liability

Preventing a criminal indictment is certainly easier than attempting to cure one. Prevention starts with a suitable corporate compliance program. Such a program can prevent and detect criminal conduct and minimizes the chance that an executive may be found criminally liable for acts committed by subordinates. Because a prosecutor often uses his discretion to charge individuals in corporate cases, the more preventive measures that an executive can point to that demonstrate an intent to limit criminal conduct, the better.²⁶

The Department of Health and Human Services has cited eight factors that are fundamental to an effective compliance program. While these factors refer to a program involving federally funded research, they are applicable to most any business or industry. An effective program must involve: 1) implementing written policies and procedures, 2) designating a compliance officer and compliance committee, 3) conducting effective training and education, 4) developing effective lines of communication, 5) conducting internal monitoring and auditing, 6) enforcing standards through well-publicized disciplinary guidelines, 7) responding promptly to detected problems and undertaking corrective action, and 8) defining roles and responsibilities and assigning oversight responsibility.²⁷

Such a program will not only help deter and detect criminal actions, but can also be strong evidence of the intent of the parties involved if a criminal investigation is pursued against the corporation and its officers and directors.

Finally, an officer should seek the advice of counsel before proceeding with any decision that seems questionable. Not only can counsel direct an executive as to the legal ramifications of corporate acts and decisions, but such advice can provide an affirmative defense. The advice of counsel defense allows officers and directors to protect themselves from liability when they have relied on the reasonable advice of informed counsel and done so in good faith.

This defense negates the element of willfulness, as it demonstrates that the party fully reported the facts to a competent attorney and followed the advice received from that attorney. The evidence must also show that the attorney directed the conduct based on pertinent information and that the party was directed based on sound legal principles.²⁸ Thus, healthcare officers should involve legal counsel on most major business decisions where liability issues are unclear and should document all information considered, advice offered, and what actions were taken. In most cases, these steps will prevent the “advice of counsel” defense from ever having to be applied, given that taking these steps provides an excellent source of prevention.

The time to consider these issues is not after an officer or director is served with a government subpoena. Being able to point to an effective compliance program and advice from counsel taken on the front-end seriously reduces the chance of a criminal prosecution. In the event that an executive finds himself subject to a criminal investigation, having these procedures in place in the corporation provides a means to argue a good faith affirmative defense. When a corporation effectively implements these measures and the measures are taken seriously, legitimate concerns about criminal liability are significantly reduced.

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[1] United States Department of Justice Fact Sheet: President’s Corporate Fraud Task Force Marks Five Years of Ensuring Corporate Integrity, July 17, 2007, available at <http://www.usdoj.gov/opa/pr/2007/July/07_odag_507.html>.

[2] Fact Sheet: Department of Justice Efforts to Combat Health Care Fraud and Abuse, May 28, 2008, available at <http://www.reuters.com/article/pressRelease/idUS230094+28-May-2008+PRN20080528?sp=true>.

[3] See generally U.S. v. Gregg, 612 F.2d 43, 50-51 (2d Cir. 1979).

[4] 51 F.3d 1390 (9th Cir. 1995).

[5] But see United States v. Mittal, 36 Fed. Appx. 20, 21 (2d Cir. 2002) (recognizing lack of unanimity among circuits as to whether prosecution of the Medicare anti-kickback statute required proof defendant knew of and intended to violate that specific statute).

[6] Bryan v. United States, 524 U.S. 184, 194-95 (1998) (citing Cheek v. United States, 498 U.S. 192, 201 (1991)).

[7] 93 F.3d 436, 441 (8th Cir. 1996).

[8] Id. See also United States v. Starks, 157 F.3d 833 (11^th Cir. 1998)(Willfully, as used in anti-kickback provision of the Social Security Act, only required knowledge that the conduct was unlawful, not that the conduct violated the specific statute at issue).

[9] Id.

[10] Bryan v. United States, 524 U.S. 184, 191 (1998).

[11] United States v. Dotterweich, 320 U.S. 277, 284 (1943).

[12] Id. at 280.

[13] See also United States v. Cordoba-Hincapie, 825 F. Supp. 485, 508 (E.D.N.Y. 1993) (“In cases involving matters traditionally within the public welfare realm — dangerous food, misbranded pharmaceuticals, toxic substances and the like — the strong public interests in enforcing the regulations at issue may arguably be viewed as justifying imposition of a strict duty of supervision and control upon corporate officers”).

[14] United States v. Park, 421 U.S. 658, 672 (1975).

[15] Id.

[16] Id. at 673-74.

[17] Id. at 669 (quoting Dotterweich, 320 U.S. at 284-85).

[18] 21 U.S.C. §§331(a) and 352.

[19] 21 U.S.C. §§331(d) and 355(a).

[20] See United States v. Caronia, 576 F. Supp. 2d 385 (E.D.N.Y. 2008) (Misbranding provisions of the FDCA prohibited the promotion by a pharmaceutical manufacturer of off-label uses of its prescription drugs).

[21] 31 U.S.C. §3729-3731.

[22] 18 U.S.C. §287. Note also that a conviction for submitting false claims to the government almost certainly will bring about civil penalties, as a conviction forecloses any questions relevant to civil liability based on the same underlying acts. See United States v. Diamond, 657 F. Supp. 1204, 1205 (S.D.N.Y. 1987) (“a prior criminal conviction establishes the facts underlying the conviction conclusively for purposes of a subsequent civil proceeding instituted by the federal government on the basis of the same facts.”) See also Photopulous, Todd P., “The (Un) Enforceability of Qui Tam Claims, Pro Te: Solutio, 1.2, 2.

[23] See 42 U.S.C. 1320a-7b(a) (felony to make any false statement or representation in an application for payment or benefit under a Federal healthcare program); 42 U.S.C. 1320a-7b(b) (Federal anti-kickback law that makes it a felony to solicit or receive funds for inducement involving a federal healthcare program); 42 U.S.C. 1320a-7b(c) (illegal to make misrepresentations concerning certification to participate in Medicare or state healthcare programs).

[24] See Sections 241-246 of the Health Insurance Portability and Accountability Act of 1996, Pub. L. 104-191 (providing criminal sanctions for a multitude of offenses related to healthcare including fraud, making false statements, and obstructing a criminal investigation).

[25] See, e.g., 18 U.S.C. 286 (conspiracy to defraud the government); 18 U.S.C. 1001 (criminal liability for knowingly and willfully making false statements to the government); 18 U.S.C. 1341 and 1343 (mail fraud and wire fraud); 18 U.S.C. 1516 (obstruction of a federal audit).

[26] Note that prosecutors also have the power to enter into deferred prosecution agreements, a somewhat controversial measure that allows a corporation to admit criminal wrongdoing and submit to terms set by the prosecutor in order to avoid indictment.

[27] 70 Fed. Reg. 71313 (Nov. 28, 2005), available at <http://www.oig.hhs.gov/fraud/docs/complianceguidance/PHS%20Research%20Awards%20Draft%20CPG.pdf>.

[28] See United States v. Cheek, 3 F.3d 1057, 1061 (7th Cir. 1993)(in order to establish the defense, “a defendant must establish that: 1) before taking action, 2) he in good faith sought the advice of an attorney whom he considered competent, 3) for the purpose of securing advice on the lawfulness of his possible future conduct, 4) and made a full and accurate report to his attorney of all material facts which the defendant knew, 5) and acted strictly in accordance with the advice of his attorney who had been given a full report.”)

Finis